What happens to investors when a P2P firm collapses?
A little-known pawnbroking and property-backed peer-to-peer lending platform named Collateral has gone into administration, according to reports. Its investors are in limbo, unable to access their money or even view their accounts.
Collateral, it transpires, was not operating under FCA authorisation. Its interim permissions seem to have lapsed in February.
The platform got into trouble when it took on an £8.5m loan that significantly outweighed demand from its investors. Now some £21m of those investors’ cash is at risk. The FCA is involved and is working with Collateral, presumably to recover the funds.
Yesterday, this news was deemed significant enough to land front and centre on the website of the Financial Times. Fair enough, I suppose: punchy peer-to-peer disruptors blowing up is attention-grabbing stuff.
But is there precedent for this situation? Have P2P platforms failed in the past? And what became of their investors? Well, since you ask…
Be The Lender folded in August 2014. It was a tiny peer-to-peer platform with a focus on lending to small businesses. The platform offered high returns to its investors and claimed to offer “market leading security to lenders providing strong protection from bad debts”.
The firm operated under interim permissions granted by the FCA. It was part of a holding company called People 2 People that went into administration when unable to pay its debts. The group encompassed a range of financial services, and at one time employed upwards of 100 people.
It transpired that some of those employees held investments in the Be The Lender platform, and that the businesses their money was being lent to included companies that were in fact part of the People 2 People group.
When it all went wrong, investors appeared to recover some but not all of their money, as our conversations with one such investor at the time revealed.
GraduRates was a very small peer-to-peer lender specialising in loans to post-graduate students. In 2014, with a new regulatory regime for P2P firms looming, its founder Jonathan Webb decided to close down operations.
It was then that leading peer-to-peer platform RateSetter stepped in to take over the servicing of the admittedly very modest GraduRates loanbook. The situation was thus unchanged for the student lenders’ borrowers, despite the business closing down.
RateSetter hailed this as an example of the P2P sector “growing up”.
TrustBuddy was a peer-to-peer firm specialising in short-term loans for consumers. It is perhaps the best-known example of a P2P blow-up because it was the first big platform to go belly-up.
A newly arrived management team uncovered evidence of serious misconduct by the platform in late 2015. The platform had been using lenders’ capital “in violation of their instructions”. Client money, it transpired, had not been held separately from the TrustBuddy company account.
The new management team’s investigation uncovered a £3.5m discrepancy between the amount owed to investors and the available balance of the client bank accounts. TrustBuddy had also been re-assigning existing loans, some of which were non-performing, to new capital deployed by lenders – thereby disguising poor performance.
The new management team informed Nasdaq OMX (the exchange on which TrustBuddy was listed) and the Swedish FSA of its findings. The FSA then demanded TrustBuddy suspend its services with immediate effect, meaning investors could not make withdrawals or deposits.
For the platform’s investors, the saga rolled on seemingly interminably. The rights of individual lenders’ in the bankruptcy was painfully unclear. The appointed liquidators at one point wished to sell off the loan portfolios in an attempt to extract as much value as possible for investors, but this course of action was resisted by some individuals, who insisted that their loan contracts were segregated property. The outstanding loanbook being squabbled over amounted to roughly £24m in size.
The fundamental argument between individual lenders and the liquidators was whether outstanding loans should be pursued or simply sold off. A protracted mess ensued. Some reports suggested investors would end up losing a quarter of their principal. The whole thing is starkly indicative of why many FCA rules for UK peer-to-peer lenders (pertaining to segregated client accounts, back-up servicing arrangements, etc.) exist.
Read more about the TrustBuddy fiasco below:
Finally, the complete comedy that was the Ezubao blow-up. There are many, many examples of failed Chinese P2P platforms, but Ezubao takes the biscuit.
Ezubao was one of China’s highest profile peer-to-peer lenders. In early 2016, it transpired that the platform had fleeced its investors for a grand total of Rmb50 billion (the equivalent of $7.6bn). 20 people were arrested in connection with what turned out to be a giant ponzi scheme.
The whole thing unfolded like a film. Two excavators were hired by police to uncover 1,200 account books buried deep underground. The platform’s 34-year old founder Ding Ning was said to have used investor cash to splash out on absurdly lavish gifts, including a Rmb130m villa in Singapore and a pink diamond worth Rmb12m. His younger brother was paid Rmb1m a month as a salaried executive. 95 per cent of the projects backed by the platform turned out to be fake, according to reports at the time.
Ezubao was and is beyond shadow of a doubt the biggest scam (accounting for the largest sum of money lost by lenders) in the history of the P2P industry.